COVID 19 will affect the economy for the next 10 years


The Ethiopian Economic Association published its new research on the economic effect of the global pandemic COVID-19, saying that it will likely have a long term effect stretching up to the next ten years.
The working paper entitled ‘The economy wide impact of the COVID-19 in Ethiopia: Policy and Recovery options’ designed its scenarios based on the six-month duration of the pandemic with mild and severe impacts.
Economic impacts resulting from the COVID19 crisis are expected to have differentiated impacts on a wide range of economic and social indicators and major macro indicators remain below when compared with the no covid period.
The paper also states that the COVID-19 pandemic is likely to have significant growth and welfare effects even under an optimistic scenario of mild shock and quick recovery. While GDP growth rate is expected to converge to the no COVID-19 baseline, the GDP losses are not likely to be recovered. The size of the Ethiopian economy would remain well below the no-COVID-19 baseline level.
“Also not all sectors will be equally affected by the crisis but with higher contraction of manufacturing activities followed by agriculture,” the paper states.
The research estimates that GDP would be lower than in the no COVID-19 scenario by 127 billion birr in 2019/20 and between 159 and 310 billion ETB in 2020/21. On this basis, the economy would grow by 2.6 percent in 2019/20. Under an amplified (or severe) pandemic scenario, GDP growth would only reach 0.6 percent in 2020/21 fiscal year.
According to the research the pandemic is expected to reduce the foreign direct investment to the country ranging from 24 to 70 percent compared to the pre pandemic period. A lower remittance inflow is also predicted with a 25 percent reduction and large reduction of 70 percent. The research sets the global shrink in the oil price as a positive impact.
The research suggests the current government intervention is not enough to put the economy on a higher growth path if it does not go beyond 2020/21 fiscal year.
The effect of the COVID-19 crisis is likely to remain negative in the coming years if a progressive recovery of the shock variables (transmission channels) does not take place. The government’s COVID-19 response plan is around 3.4 billion USD. While 1.6 billion USD is planned for emergency response, 1.8 billion USD is for macroeconomic interventions.
Moreover, a progressive recovery is not likely to allow the economy to reach its preCOVID-19 size. GDP would be lower by 106 billion birr than the baseline in the mild case in 2029/30 and by 610 billion birr lower in the severe case. By the end of the time horizon of our model, 2029/30, and without recovery, GDP would be lower than that of the baseline (no-COVID-19) by 489 billion birr in the mild case and by 1,259 billion birr in the severe case. This poor GDP performance is reflected in the drop in exports, investment and final consumption.
The analysis accounts for the main channels through which the COVID-19 affects the economy. The domestic transmission channels include reduced labor market participation, lower productivity, and rising domestic trade costs. External channels include higher international trade costs, a drop in export demand, lower import supply, a reduction in foreign direct investment, reduction in remittances, and lower import price of oil.
“Employment is likely to be hit hardest. The employment level is between 8.6 percent and 16.5 percent lower than the baseline. Job losses would be severe in all the export-oriented sectors. Rural employment is slightly more affected than,” the paper further stated.
The negative impact of the crisis on household welfare would be severe as the research asses. Real consumption expenditure could be between 4.6 and 12 percent lower than in the reference scenario in the short term. In the absence of appropriate measures, the most vulnerable populations are likely to be more severely impacted. The welfare loss of the bottom 20 percent is between 1.6 and 2.5 times higher than the top 20 percent without any in-kind and/or cash transfers. Household welfare at the national level would be 1.9 percent and 10.7 percent lower than the no-COVID-19 scenario in the mild and severe cases, respectively.
“Even if the transmission channels of the COVID-19 to the Ethiopian economy partly regain their pre-crisis level, households in the lowest income categories will have higher welfare reduction than households in the highest quintile,” the paper states.
“The COVID-19 pandemic is likely to have a substantial effect on public finance. Fiscal deficit is likely to widen in absolute terms and in percentage of GDP. Government revenue would decline, at the same time, expenditure would increase to deliver emergency health care services and food assistance, and increase containment efforts, all of which will widen fiscal deficit. Without the assistance of development partners, deficit financing could result in severe deterioration of the fiscal framework with the risk of jeopardizing macroeconomic stability and debt sustainability,” the paper indicates.
“Government response plan is of paramount importance for the medium- and long term perspectives, especially if the impact of the pandemic is to be more severe. The adverse impact of the pandemic on investment would be even larger without government intervention. Household welfare falls more sharply without relief and recovery measures.”
“There is uncertainty on the duration of the pandemic in Ethiopia and worldwide. This implies that recovery may not come as quickly as would be anticipated putting the Ethiopian economy closer to the severe scenario rather than the mild case. Government support is much needed not only by increasing its spending under the COVID-19 response plan, but by creating an enabling environment that would allow social safety nets to share the burden,” the paper further states.
“Given the multi faced nature of COVID-19 induced challenges facing the country, a recovery and response plan is urgently needed to achieve dual objectives of mitigating further economic contraction and of stimulating the economy. The recovery and response plan shall target and safeguard sectors essential for food security, job creation and sustainable and inclusive growth.”
“Both fiscal and monetary policy instruments that have been introduced by the government to fight the pandemic shall be continued, enforced and monitored, in a coordinated way, to support the effectiveness of interventions until the economy recovers,” the paper recommends.
“The recovery and response plan requires rapid and predictable financing which shall come from two sources. It is important that the international community provides quick and coordinated support. Given the uncertainty of external finance in terms of delivery and amount, it is necessary to design a strategy for mobilizing domestic sources of finance which has increasingly become a dependable source of development finance,” reads the paper.
The macroeconomic closure imposes that the government budget balance is endogenous while government expenditure (recurrent and capital) is exogenous and calibrated in the baseline to reflect past performances.
On the much uncertainty on the future of economic activity in the post-COVID19 years the association assesses the medium to long term effects based on four assumptions; no government intervention, relief measures combined with lower import prices of oil financed via higher deficit, relief measure with the above mix of financing sources and progressive recovery of the economy within a period of three years starting from 2021/22.